Answer to Question #114392 in Macroeconomics for jasmin

Question

Suppose due to a war in a neighbouring country, the country received refugees
which increased the labour force. Also, there is a huge reduction in global oil prices.
By using the Aggregate Supply curve, show the possible effects of these two changes
on the price level and aggregate output in the Short-Run. Explain each step in your
graph.

Answer 1

From figure (a) above the short run aggregate supply

curve is sloping upwards showing that there is a positive relationship between the price level and the output.

• Because the quantity supplied increases due to the rise in prices this leads to an outward shift increasing the real GDP at a given price.
• The higher the price level the more the sellers will be willing to supply
• From the question, there will be high production due to increase in labor. Also the fall in global oil prices will arise since the sellers will be encouraged to supply more into the market due to increase in production which will lead to high competition.